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Free Market Environmentalism

Free Market Environmentalism

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Published by Mises Fan
Free-market environmentalism emphasizes markets as a solution to environmental problems. Proponents argue that free marketscan be more successful than government—and have been more successful historically—in solving many environmental problems.
Free-market environmentalism emphasizes markets as a solution to environmental problems. Proponents argue that free marketscan be more successful than government—and have been more successful historically—in solving many environmental problems.

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Published by: Mises Fan on May 10, 2013
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11.05.13Free-Market Environmentalism: The Concise Encyclopedia of Economics | Library of Economics and Libertywww.econlib.org/library/Enc/FreeMarketEnvironmentalism.html1/6
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Free-Market Environmentalism
by Richard L. Stroup
About the Author
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|2nd edition| Free-Market Environmentalism
ree-market environmentalism emphasizesmarkets as a solution to environmentalproblems. Proponents argue that free marketscan be more successful than government—andhave been more successful historically—in solvingmany environmental problems.
This interest in free-market environmentalism issomewhat ironic because environmental problems haveoften been seen as a form of market failure (see
PUBLICGOODS
and
EXTERNALITIES
). In the traditional view, manyenvironmental problems are caused by decision makerswho reduce their costs by polluting those who aredownwind or downstream; other environmental problemsare caused by private decision makers’ inability to produce “public goods” (such as preservation of wild species)because no one has to pay to get the benefits of thispreservation. While these problems can be quite real,growing evidence indicates that governments often fail tocontrol pollution or to provide public goods at reasonablecost. Furthermore, the private sector is often moreresponsive than government to environmental demands.This evidence, which is supported by much economictheory, has led to a reconsideration of the traditional view.The failures of centralized government control in EasternEurope and the Soviet Union awakened further interest infree-market environmentalism in the early 1990s. As
glasnost 
lifted the veil of secrecy, press reports identifiedlarge areas where brown haze hung in the air, people’seyes routinely burned from chemical fumes, and drivershad to use headlights in the middle of the day. In 1990the
Wall Street Journa
quoted a claim by Hungariandoctors that 10 percent of the deaths in Hungary mightbe directly related to pollution. The
New York Times
reported that parts of the town of Merseburg, EastGermany, were “permanently covered by a white chemicaldust, and a sour smell fills people’s nostrils.” For markets to work in the environmental field, as in anyother, rights to each important resource must be clearlydefined, easily defended against invasion, and divestible(transferable) by owners on terms agreeable to buyer andseller. Well-functioning markets, in short, require “3-D” 
PROPERTY
 
RIGHTS
. When the first two are present—cleardefinition and easy
DEFENSE
of one’s rights—no one isforced to accept pollution beyond the standard acceptableto the community. Local standards differ because peoplewith similar preferences and those seeking similaropportunities often cluster together. Parts of Montana, for 
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11.05.13Free-Market Environmentalism: The Concise Encyclopedia of Economics | Library of Economics and Libertywww.econlib.org/library/Enc/FreeMarketEnvironmentalism.html2/6
  “range country.” In those areas, anyone who does notwant the neighbors’ cattle disturbing his or her gardenhas the duty to fence the garden to keep the cattle out.On the really large ranches of range country, that solutionis far cheaper than fencing all the range on the ranch. Butmuch of the state is not range country. There, theproperty right standards are different: It is the duty of the cattle owner to keep livestock fenced in. People in thetwo areas have different priorities based on goals thatdiffer between the communities. Similarly, the “acceptable noise” standard in a vibrant neighborhood of the inner city with many young people might differ fromthat of a dignified neighborhood populated mainly bywell-to-do retirees. “Noise pollution” in one communitymight be acceptable in another, because a standard thatlimits one limits all in the community. Those whosometimes enjoy loud music at home may be willing toaccept some of it from others. Each individual has a rightagainst invasion of himself and his property, and thecourts will defend that right, but the standard thatdefines an unacceptable invasion can vary from onecommunity to another. And finally, when the thirdcharacteristic of property rights—divestibility—is present,each owner has an incentive to be a good steward:preservation of the owner’s wealth (the value of his or herproperty) depends on good stewardship.Environmental problems stem from the absence orincompleteness of these characteristics of property rights.When rights to resources are defined and easily defendedagainst invasion, all individuals or
CORPORATIONS
, whetherpotential polluters or potential victims, have an incentiveto avoid pollution problems. When air or water pollutiondamages a privately owned asset, the owner whose wealthis threatened will gain by seeing—in court if necessary—that the threat is abated. In England and Scotland, forexample, unlike in the United States, the right to fish forsport and commerce is a privately owned, transferableright. This means that owners of fishing rights can obtaindamages and injunctions against polluters of streams.Owners of these rights vigorously defend them, eventhough the owners are often small anglers’ clubs withmodest means. Fishers clearly gain, but there is a cost tothem also. In 2005, for example,
I
NTERNET
advertisementsoffered fishing in the chalk streams of the River Anton,Hampshire, at 50 pounds British per day, or about $90U.S. On the River Avon in Wiltshire, the price per day was150 pounds, or $270. Valuable fishing rights encouragedtheir owners to form an association prepared to go tocourt when polluters violate their fishing rights. Suchsuits were successful well before Earth Day in 1970, andbefore pollution control became part of public policy. Oncerights against pollution are established by precedent, asthese were many years ago, going to court is seldomnecessary. Potential plaintiffs who recognize they are likelyto lose do not want to add court costs to their losses.Thus,
LIABILITY
for pollution is a powerful motivator when afactory or other potentially polluting asset is privately 
 
11.05.13Free-Market Environmentalism: The Concise Encyclopedia of Economics | Library of Economics and Libertywww.econlib.org/library/Enc/FreeMarketEnvironmentalism.html3/6
owne. e case o e ove ana, a noorous wasedump, illustrates this point. As long as Hooker ChemicalCompany owned the Love Canal waste site, it wasdesigned, maintained, and operated (in the late 1940sand 1950s) in a way that met even the EnvironmentalProtection Agency standards of 1980. The corporationwanted to avoid any damaging leaks, for which it wouldhave to pay.Only when the waste site was taken over by localgovernment—under threat of eminent domain, for thecost of one dollar, and in spite of warnings by Hookerabout the chemicals—was the site mistreated in ways thatled to chemical leakage. The government decision makerslacked personal or corporate liability for their decisions.They built a school on part of the site, removed part of the protective clay cap to use as fill dirt for another schoolsite, and sold off the remaining part of the Love Canal siteto a developer without warning him of the dangers asHooker had warned them. The local government alsopunched holes in the impermeable clay walls to buildwater lines and a highway. This allowed the toxic wastesto escape when rainwater, no longer kept out by thepartially removed clay cap, washed them through thegaps created in the walls.The school district owning the land had a laudable butnarrow goal: it wanted to provide
EDUCATION
cheaply fordistrict children. Government decision makers are seldomheld accountable for broader social goals in the way thatprivate owners are by liability rules and potential
PROFITS
.Of course, anyone, including private parties, can makemistakes, but the decision maker whose private wealth ison the line tends to be more circumspect. The liabilitythat holds private decision makers accountable is largelymissing in the public sector.Nor does the government sector have the long-range viewthat property rights provide, which leads to protection of resources for the future. As long as the third
D,
divestibility, is present, property rights provide long-termincentives for maximizing the value of property. If I minemy land and impair its future
PRODUCTIVITY
or itsgroundwater, the reduction in the land’s value reduces mycurrent wealth. That is because land’s current worthequals the
PRESENT
 
VALUE
of all future services. Fewerservices or greater costs in the future mean lower valuenow. In fact, on the day an appraiser or potential buyercan first see that there will be problems in the future, mywealth declines. The reverse also is true: any new way toproduce more value—preserving scenic value as I log myland, for example, to attract paying recreationists—iscapitalized into the asset’s present value.Because the owner’s wealth depends on good stewardship,even a shortsighted owner has the incentive to act as if heor she cares about the future usefulness of the resource.This is true even if an asset is owned by a corporation.Corporate officers may be concerned mainly about theshort term, but as financial economists such as Harvard 

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